The Economics of Solicited and Unsolicited Credit Ratings

Fulghieri, Paolo; Strobl, Günter; Xia, Han

doi:10.1093/rfs/hht072

Cited by 136 publications

(61 citation statements)

References 28 publications

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“…The effect of unsolicited ratings on bond yields noted here is also confirmed by Poon, Lee, and Gup (2009), Byoun and Shin (2011), and Fulghieri, Strobl, and Xia (2010).…”

supporting

confidence: 78%

Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

Han¹,

Pagano²,

Shin

2012

Financial Management

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Why do foreign firms obtain credit ratings by global rating agencies rather than from their home country's rating agencies even though global raters typically assign lower credit ratings when these foreign firms issue bonds in their home currencies? We find that bonds rated by a global agency decreased yields 11‐14 basis points (bps) when compared to those rated by Japanese rating agencies but, during the 2007‐2009 financial crisis, the yields on these Japanese bonds increased 12‐17 bps, thus fully negating the advantage of obtaining a bond rating from a global rater. This suggests that the reputation of global rating agencies declined during the 2007‐2009 crisis period.

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“…The effect of unsolicited ratings on bond yields noted here is also confirmed by Poon, Lee, and Gup (2009), Byoun and Shin (2011), and Fulghieri, Strobl, and Xia (2010).…”

supporting

confidence: 78%

Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

Han¹,

Pagano²,

Shin

2012

Financial Management

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“…Other research has focused on the power of rating agencies rather than that of their clients. Rating agencies may issue downside-biased unsolicited ratings for which no fee is charged, thus threatening credit issuers who do not solicit ratings (Partnoy, 2002;Fulghieri et al, 2010). According to Griffin and Tang (2011), rating teams that interact more closely with their clients produce more upwardly biased ratings than those teams in the supervisory unit.…”

Section: Literaturementioning

confidence: 99%

Bank ratings: what determines their quality?

2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may ABSTRACTThis paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks' expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of 'too-big-to-fail' banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities. Non-technical summaryCredit ratings play a key role in the financial system, but the determinants of their quality are poorly understood. This paper focuses on the information content of bank credit ratings, which affect the costs of the annual issuance of more than US$600 billion in unsecured bank debt in Europe alone.Our analysis provides the most comprehensive analysis of bank rating quality so far, based on approximately 39,000 quarterly bank ratings over 1990-2011 from Standard and Poor's, Moody's and Fitch. We deploy a new method for evaluating rating quality, which interprets bank credit ratings in a strictly ordinal manner: that is, as relative measures of credit risk. Banks are ranked firstly by their credit rating and secondly by their expected default frequency two years later. The difference between these two ranks is defined as the Ordinal Rating Quality Shortfall (ORQS), which provides a good measure of relative rating error, since it does not require measurements of bank risk to be correct in absolute terms. Moreover, using expected default frequencies directly from Moody's KMV database precludes arbitrariness in modelling choices.Four key findings emerge. First, ordinal rating quality is countercyclical. The (ordinal) information content of credit ratings is higher during banking crises. This finding confirms the prediction of some of the theoretical literature, which posits that the net benefits to rating agencies of providing good quality ratings are lower during peaks in the business cycle.Second, bank rating...

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“…Thus, incorporating these considerations has an effect similar to a reduction in the accuracy of (exogenously generated) ratings. 6 Important considerations include the role of CRA reputation and moral hazard (Mathis, McAndrews, and Rochet (2009), Bar-Isaac and Shapiro (2013), Fulghieri, Strobl, and Xia (2014), Goel and Thakor (2015), Kashyap and Kovrijnykh (2015)), feedback effects and ratings as coordination devices (Boot, Milbourn, and Schmeits (2006), Manso (2013), Goldstein and Huang (2017)), and the implications of rating-contingent regulation (Opp, Opp, and Harris (2013), Josephson and Shapiro (2019)). 7 See http://faculty.haas.berkeley.edu/bgreen/files/RatingsWP2017.pdf.…”

Section: Related Theoretical Literaturementioning

confidence: 99%

Securitization, Ratings, and Credit Supply

Daley¹,

Green²,

Vanasco

2019

The Journal of Finance

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We develop a framework to explore the effect of credit ratings on loan origination. We show that ratings endogenously shift the economy from a signaling equilibrium, in which banks inefficiently retain loans to signal quality, toward an originate‐to‐distribute equilibrium with zero retention and inefficiently low lending standards. Ratings increase overall efficiency, provided that the reduction in costly retention more than compensates for the origination of some negative net present value loans. We study how banks' ability to screen loans affects these predictions and use the model to analyze commonly proposed policies such as mandatory “skin in the game.”

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The Economics of Solicited and Unsolicited Credit Ratings

Cited by 136 publications

References 28 publications

Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt

Bank ratings: what determines their quality?

Securitization, Ratings, and Credit Supply

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